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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

German factory orders tumble; US trade deficit narrows - as it happened

An employee of German car manufacturer Mercedes Benz installs wheel at a A-class model at the production line at the Daimler factory in Rastatt, Germany.
An employee of German car manufacturer Mercedes Benz installs wheel at a A-class model at the production line at the Daimler factory in Rastatt, Germany. Photograph: Kai Pfaffenbach/Reuters

Closing summary

Time for a recap.

Fears over the health of Germany’s economy are mounting, after it suffered its biggest drop in factory orders since 2012. Orders plunged 7% in December compared to a year ago, as German manufacturers suffered from falling demand from overseas.

Germany’s economy ministry warned that there was “muted momentum at the start of the year” too. Some economists fear that Germany could fall into a technical recession, unless demand picks up soon.

In another blow to German industry, the EU has blocked a merger between Siemens and France’s Alstom. Paris is furious, claiming a pan-European rail giant is needed to challenge China.

The US trade deficit has narrowed, in what could be seen as a win for Donald Trump. However, the move was mainly due to falling imports, not a surge in exports (which fell slightly).

S&P has warned that it could downgrade some British companies in a no-deal Brexit - and possibly even cut the UK’s credit rating.

Shares in Ocado have tumbled over 6%, after one of its robotic warehouses was hit by a severe fire yesterday

After a largely uneventful day, Britain’s FTSE 100 has closed down 4 points at 7,173, a minuscule dip of 0.06%.

In Frankfurt, the DAX shed 0.4%.

Obviously Germany’s weak factory orders didn’t cheer investors. After yesterday’s surge, it will take better news to get markets excited.

UK housebuilders Barrett and Redrow had a good day, though, after reassuring the City with their latest results.

David Madden of CMC Markets explains:

Barratt Developments and Redrow revealed solid first-half numbers today. Barratt’s saw revenue and profit before tax rise by 7.2% and 19.1% respectively. The net cash position increased by 133%, and operating margin improved by 130 basis points to 19.2%. It is impressive that margins improved in an environment of higher wages and material costs. Barratt’s confirmed that forward sales increased by 7.3%, and the full-year outlook remains in line with the board’s expectations.

Redrow also put in a solid performance in the first-six months. Pre-tax profit for the six-month period jumped to record levels, and group revenue ticked up by 9%. Legal completions rose by 12%, and the order book ticked up by 11%. Some investors are cautious of the UK property market due to cooling prices and uncertainty surrounding Brexit, but Redrow and Barratt Developments have shown the market the industry is still strong.

Over on Wall Street, the Dow has dipped by 40 points in quiet trading to 25,371 points.

Two gaming companies are having a bad day. Take-Two Interactive Software has plunged 14% after the maker of Grand Theft Auto and Red Dead Redemption 2 posted results which weren’t as strong as analysts hoped.

Electronics Arts is also tanking, down 16%, after missing forecasts last night.

Some analysts wonder if the phenomenal success of Fortnite is hurting the rest of the industry....

S&P: No-deal Brexit could lead to ratings downgrades

Ratings agency S&P has warned that the UK’s credit rating will come under pressure if it leaves the European Union without a deal next month.

In a new report, S&P says it still expects an orderly exit, as this is in the best interests of the UK and the EU.

But it warns that the risk of a no-deal Brexit remains high. And it could downgrade some British companies, if a no-deal Brexit leads to “immediate and material” disruption.

S&P Global Ratings credit analyst Paul Watters says:

“In the case of no deal, where short-term disruption proves to be material enough to undermine competitiveness and operational performance, then downgrades could occur, particularly for certain non-financial corporates.”

S&P currently gives the UK a “AA” credit rating, which is the third-highest notch, with a negative outlook. S&P says “downward pressure” could build on this sovereign rating, if a “disorderly” Brexit appears more apparent, adding:

Our current negative outlook on the ‘AA’ sovereign rating on the U.K. reflects our view of the risk of sustained economic weakness and a deterioration in government finances if merchandise and services exports from the U.K. lose access to key European markets, external financing diminishes, or sterling’s status as a reserve currency comes under pressure.

Downward pressure could build on the ratings under a scenario where the likelihood of a “disorderly” Brexit appears more apparent. We define a “disorderly” Brexit as one that would either significantly limit U.K. manufacturing and services access to key European markets or subject them to tariffs and nontariff barriers high enough to reduce their ability to compete.

S&P says that “the detrimental effects of no-deal on the banking system” could result in negative rating actions on U.K. banks.

It estimate that around 20 companies, mainly based in the UK, could be face a “negative rating action” such as a downgrade, if Britain crashes out without a deal.

It adds:

The most exposed sectors are automotive, leisure, retail, real estate, aerospace and defence, and transport infrastructure.

In other trade news, US treasury secretary Steven Mnuchin has announced that he will travel to Beijing next week to resume negotiations with China.

Mnuchin will be accompanied by United States Trade Representative Robert Lighthizer, and other officials. It’s a new attempt to reach a breakthrough before March - the deadline before the US hikes tariffs on Chinese imports.

Mnuchin told CNBC that Washington was committed to seeking a deal.

“Ambassador Lighthizer and myself and a large team are on our way to Beijing next week. We are committed to continue these talks.

We’re putting in an enormous amount of effort to try to hit this deadline and get a deal. So that’s our objective.”

Updated

Well, quite....

This narrowing of the US trade gap is a win for Donald Trump, argues CNBC:

I’m not quite convinced. It would be better if the gap was narrowing thanks to a jump in exports, rather than a shrivelling of imports. But Trump, with his mercantilist view of trade, may disagree.

US trade gap narrows

Newsflash: America’s trade deficit with the rest of the world has narrowed, due to a big drop in imports.

The gap between imports and exports narrowed to $49.3bn in November, the Census Bureau reports, down from $55.7bn in October.

That’s a smaller deficit than economists had expected.

Imports shrank by 2.9%, mainly due to fewer mobile phones and less petroleum being imported (the US has just become a net exporter of oil, following the shale boom).

Updated

No early fireworks expected on Wall Street today:

It’s been a rather underwhelming day in the markets. The FTSE 100 is now flat, while Germany’s DAX has shed 0.5%.

Lukman Otunuga, research analyst at FXTM, suspects a sell-off could be looming.

Stocks in Asia witnessed another muted session today as many markets in the region remain closed for the Lunar New Year holiday.

In Europe, shares got out of the wrong side of the bed thanks to weak earnings from French banking group BNP Paribas and disappointing data from Germany. While Wall Street has the potential to extend gains this afternoon on strong corporate earnings and cautious optimism over US-China trade talks, the medium- to longer-term outlook for equity markets tilts to the downside.

Concerns over slowing global growth remains a dominant theme while the unpredictable nature of trade negotiations has certainly left investors on edge. With other geopolitical risks such as Brexit, China’s slowdown, Eurozone growth concerns and political turbulence in Washington seen stimulating risk aversion, the ingredients are in place for a stock market sell-off.

It’s worth noting that the recent rally has coincided with a pick-up in the amount of money sloshing around in the markets, as central bankers have pumped up liquidity. Bloomberg has a good take here.

The eurozone slowdown comes at a tricky time for the European Central Bank.

The ECB only just ended its stimulus programme of buying bonds with newly-created money, and has suggested it could start raising interest rates from their current record lows this summer.

Some economists are now wondering if the ECB might be forced to offer more cheap long term loans for banks (through its TLTRO programme) in the next few months.

Emerging stock markets have made a good start to 2019; Brazil is up over 10%, Mexico has gained 6.5% and China is 5% higher.

That’s due to a pick-up in risk appetite after last autumn’s sell-off. Signs that central bankers are turning more dovish has also boosted shares.

But has the rally gone too far? Morgan Stanley suspects a correction is coming....

Updated

Overnight, tech giant Apple revealed that its retail boss - Angela Ahrendts - is leaving.

Ahrendts was recruited (at no small expense!) from luxury fashion chain Burberry. She played a key role over the last few years as Apple turned itself into a trillion dollar company last year, while earning twice as much as CEO Tim Cook himself.

My colleague Alex Hern says it’s a “rare loss of talent” for Apple.

Ahrendts’ replacement, Deirdre O’Brien, has a more typically Apple history: she joined the company 30 years ago and is already the vice-president of the people department at the company.

The Apple retail arm, which covers its online and brick-and-mortar stores, has been a jewel in the crown throughout the period, with Ahrendts a regular fixture at press conferences to share successes such as new flagship locations, popular live events and free tutorials for new buyers.

Here’s his full take:

Recent German manufacturing data do not paint a pretty picture:

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, has now weighed in on this morning’s dire German factory orders.

He says the 1.6% month-on-month decline was a “nasty headline”, adding:

“Across sectors, weakness in capital and intermediate goods were the primary drivers, especially on the export side to non-eurozone countries. By contrast, new orders for consumer goods rebounded strongly across the board, pointing to a revival in the auto sector towards the end of the year.

“The year-over-year rate was depressed by base effects from a very strong finish to the year in 2017, but the message remains clear: German manufacturing is suffering.”

Row as EU blocks Alstom-Siemens merger

Europe’s competition authorities have just derailed a massive planned merger between trainmakers Alstom and Siemens, triggering a massive political row.

Antitrust commissioner Margrethe Vestager has ruled that allowing France’s Alstom and Germany’s Siemens to combine would have created a near monopoly in the European train-making market.

This, she fears, would have hampered competition and driven prices up, so she’s pulled the emergency cord and brought the deal to a sudden halt.

Announcing the decision, Vestager says:

“The Commission prohibited the merger because the companies were not willing to address our serious competition concerns.”

Alstrom makes trains for France’s high-speed TGV service, while Siemens ICE-4 ,models are used on Germany’s own high-speed network. The two companies had hoped to create a new European powerhouse that could have competed better on the world stage against rivals such as China’s CRRC.

French finance minister Bruno Le Maire has alreay blasted the move, claiming it was a serious political and economic mistake, adding:

“It’s going to serve China’s economic and industrial interests.”

If so, this won’t make Vestager may new friends in Brussels....

Ocado’s shares have now slumped by 7.5% since it warned that the fire at its Andover distribution centre was worse than first feared.

That wipes more than £500m off the value of the company, leaving it firmly stranded at the bottom of the FTSE 100 leaderboard.

Here’s our news story about the fire, and the disruption it will cause:

As these photos show, firefighters are still attending the scene in Hampshire today:

Firefighters at the scene of Ocado robotic warehouse in Andover, Hampshire.
Firefighters at the scene of Ocado robotic warehouse in Andover, Hampshire. Photograph: Andrew Matthews/PA
Firefighters at the scene of Ocado robotic warehouse in Andover, Hampshire.

German carmaker Daimler has reported that net profits almost halved in the last quarter of 2017, as the diesel crisis hurt demand.

Daimler’s earnings were scraped by the cost of developing new, greener, technologies for electric vehicles.

The US-China trade war also hurt profitability, as it meant higher tariffs on some cars manufactured at Chinese or American factories.

Although revenues rose 7%, net earnings fell 49% to €1.64bn, in another sign that German companies found 2018 tough going.

Associated Press has more details:

“For Daimler, 2018 was a year of strong headwinds,” said CEO Dieter Zetsche, presenting his last annual results before handing off to successor Ola Kallenius at the May 21 shareholder meeting.

He said that “we cannot and will not be satisfied” with lower profit margins. He added that the company was coming up with plans to increase profitability though declined to indicate what steps might be taken.

More reaction to today’s German data:

Britain’s watchdogs have been showing their teeth this morning.

The Advertising Standards Authority’s (ASA) has banned gambling ads that ran in ITV’s I’m a Celebrity … Get Me Out of Here app for breaking rules designed to protect children from being encouraged to bet.

Here’s our news story about the crackdown on travel sites who use unscrupulous tactics to scare people into making holiday bookings:

One common trick, apparently, is to tell you that X customers are also looking at the same hotel - without revealing that they’re actually looking at different days! #scoundrels

German construction growth slows

More bad news from Germany -- growth across its building sector almost fizzled out last month.

Data firm Markit says its German construction PMI (which measures activity across the sector) fell to just 50.7, down from 53.3 in December. That’s worryingly close to stagnation (50.0).

German construction PMI
German construction PMI Photograph: Markit

Markit says construction firms were hit by bad weather in January, which made it harder for builders to crack on.

Commercial construction activity fell at the fastest rate in almost six years, while house-building increased at a much slower rate than in December.

Phil Smith, Principal Economist at IHS Markit, says the PMI data shows slower growth across a number of key business metrics. Winter storms, snow and ice are probably the main culprits, he adds.

The fact that growth in total industry activity slowed down more than new orders, which remained comparatively robust, suggests that it wasn’t necessarily a demand-driven slowdown and that severe bad weather probably did cause some disruption to actual work on the ground during the opening month of the year.

Updated

European stock markets have opened in the red, after this morning’s woeful German factory orders.

In Frankfurt, the DAX index of Germany’s top companies has lost 0.3%, with Daimler down almost 2% and Deutsche Bank down 1.5%.

In London, the FTSE 100 has dropped by 18 points (0.3% to 7,158, away from last night’s three-month low. Online grocery firm Ocado is leading the fallers, down 5%, after a huge fire swept through its robotic warehouse in Hampshire.

Ocado has just told shareholders that the damage is wore than first thought:

Unfortunately the fire which started yesterday morning in a corner of the ambient grid was not contained as we believed, and last night expanded.

Whilst we are informed by the Fire Brigade that it is now under control, during the night part of the roof collapsed and there has been substantial damage to the majority of the building and its contents.

European stock markets
European stock markets Photograph: Refinitiv

Deutsche Bank: Germany is drifting towards recession

Today’s grim factory orders data come just hours after Deutsche Bank warned that Germany is probably heading for recession.

In a new report, Deutsche economists wrote:

“The start of the German economy into 2019 has been a major disappointment so far.

“The development of several key cyclical indicators is telling us that the German economy is drifting towards recession right now.”

They could point to a drop in German industrial output late last year, and a smaller-than-expected drop in unemployment in January.

German factory orders “took a nosedive” in December, says economist Carsten Brzeski of ING ruefully, adding:

The inventory build-up in recent months, as well as the recent drops in order books, suggest that any rebound of industrial activity in Germany will be slow and sluggish.

Germany’s economy ministry: Industry remains weak

Germany’s economy ministry doesn’t see much cheer in today’s factory orders, saying:

“The decline in orders in December suggests that the weak phase in industry will continue for now.

The latest sentiment indicators also point to muted momentum at the start of the year.”

The decline in German factory orders was mainly due to weaker demand for abroad.

Orders from outside the eurozone plunged by 5.5% month-on-month in December, while domestic orders dipped by 0.6%.

German factory orders slide again

The flags of Germany.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Concerns over the health of the German economy are mounting this morning, after Europe’s largest economy suffered another big fall in manufacturing orders.

Germany factory orders plunged by 1.6% in December, new figures released this morning show, due to weak demand from overseas.

That’s much worse than the 0.3% rise which economists had expected, and follows a 0.2% decline in November.

German factory orders
German factory orders Photograph: Destatis

On an annual basis, orders were a chunky 7% lower than in December 2017. That looks to be the biggest drop since 2012.

Such a weak result shows that Germany’s industrial base is struggling in the face of trade tensions, slowing global growth, and Brexit anxiety.

Germany’s car industry has also had a bad few months. They’ve struggled to get models tested and onto the road following the introduction of new, tougher, pollution rules.

We already know that German GDP shrank by 0.2% in July to September; some economists fear its economy may have kept shrinking, putting the country into recession.

More reaction to follow....

Also coming up today

European stock markets are tipped to open flat, after a strong rally on Tuesday that saw the FTSE 100 jump by 2% to a new three-month high.

Britain’s Competitions and Markets Authority is enforcing a clampdown on some of the biggest online hotel booking sites - calling it “a victory for UK holidaymakers”. More on that shortly.

Struggling outsourcing group Interserve has announced a whopping debt-for-equity swap rescue deal.

Plus we should get new US trade figures, and the weekly oil inventory stats, which should give another insight into the state of America’s economy

The agenda

  • 1.30pm GMT: US trade figure for November
  • 3.30pm GMT: US weekly oil inventory figures

Updated

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